Housing’s Worst Year in Nearly 30 Years

It is not much of a stretch to say that home sales are in the basement. In 2024, the annual number of existing homes sold fell slightly to 4.06 million, the lowest since 1995.

It’s important to note that 2024 came in lower than we observed during the height of the financial crisis in 2008 and 2009. Contrary to conventional wisdom, home prices have remained high despite the substantial decline in sales.

The median price of a home sold in the third quarter of 2024 was $420,400, according to price data from the St. Louis Federal Reserve.

Despite the sharp decline in sales, Q3’s median price sold is down just 5% from the peak two years ago. It’s up sharply from the pre-pandemic price of $329,000 in Q1 2020.

According to the National Association of Realtors, it boils down to a scarcity of homes for sale.

In part, some homeowners who might like to sell are reluctant to give up a low mortgage rate obtained in 2020 or 2021, which restricts the number of homes for sale and props up prices.

Inventories of homes available will likely rise in the spring, but they are expected to remain historically low. Over time, however, prospective buyers may become accustomed to higher rates, while current homeowners may recognize that they can no longer wait for lower mortgage rates as their life circumstances evolve.

Despair to Jubilation and Beyond

It’s prudent to cautiously eye rapid changes in market sentiment caused by short-term traders. A week ago, our summary focused on a strong jobs report, rising bond yields, and general concerns about inflation. There was a sense of despair among traders at week’s end.

With the arrival of a new week, investors shifted their focus from what felt like a suspenseful thriller to a lighthearted, family-friendly feature that even concluded with a Hallmark ending.

What happened? Short-term traders were on the edge of their seats on Wednesday, awaiting the release of the December Consumer Price Index (CPI) by the U.S. Bureau of Labor Statistics.

While the headline CPI rose a slightly higher than expected 0.4%, the core CPI, which excludes food and energy, rose a slightly smaller than expected 0.2%. Major news outlets, including the Wall Street Journal, published the consensus forecast.

Call it a major relief rally, as longer-term Treasury bond yields plummeted, and stocks rallied sharply. The headline CPI is important, but investors were solely focused on the core CPI.

As the graphic illustrates, the road to a lower inflation rate has been bumpy. While progress has slowed, the peaks and valleys in the 4-month moving average remain in a downward trend.

Further, last week was the unofficial kickoff to Q4 earnings season. According to LSEG, the early read is favorable, as companies, on average, are topping analyst estimates by a wide margin.

Separately, the inauguration of Donald Trump on Monday marks the beginning of a new chapter for our nation. It’s early, but the new president could issue a flurry of executive orders, which may support (deregulation) or dampen enthusiasm (hefty tariffs) for equities, at least in the short term.

Over the longer term, however, it’s the economic fundamentals— including the economy, corporate earnings, and interest rates—that influence markets.

Ultimately, it’s important to stay focused on your financial goals, maintain diversification, understand your financial comfort zone, and be mindful that volatility, when it arises, shouldn’t distract you from your unique investment plan and goals.

A Wall Street vs Main Street Jobs Report

On Friday, the U.S. Bureau of Labor Statistics reported that nonfarm payrolls grew by 256,000 in December, easily surpassing analyst expectations of a more modest increase of 155,000 (Wall Street Journal). The unemployment rate eased to 4.1% last month from 4.2% in November. The unemployment rate has been hovering in a narrow range of 4.1 – 4.2% since June.

On Friday, it was “good news is bad news” for investors.

First, let’s review Wall Street’s reaction. According to CNBC, the Dow fell 1.6% (697 points), and the S&P 500 Index lost 1.5% (91 points) amid rising bond yields and interest rate worries.

A stronger economy and a strong job market (good news) diminish the odds that the Fed will lower interest rates this year (bad news). Although a closely followed gauge by the CME Group currently puts the odds of a 2025 rate hike at 0%, a few are whispering about the possibility of a rate hike in 2025, especially if inflation ticks higher.

But what about Main Street? Main Street celebrates a strong economy and abundant jobs.

We’re not seeing it in every sector, such as information technology and the financial sectors, as the Wall Street Journal reported last week.

But overall, the jobless rate is low, and the economy is creating employment opportunities. Sure, job growth is down from unsustainably strong levels when the economy was re-opening, but growth is respectable.

When markets are priced for perfection, any disappointment can lead to a reset of expectations and a decline in stock prices, as we have previously observed and discussed.

Yet, a strong jobs report reflects a strong economy. Any pullback resulting from a strong economy is preferred over a pullback stemming from unexpected economic weakness.

Furthermore, an upbeat economy underpins corporate profits (good news), and rising profits have historically lent support to stocks.

It is not always an immediate tailwind for equities, and rate worries are on the front burner right now, but historically, profit growth has been a long-term driver of stocks.